21 May Drafting and Enforcing Post-Employment Restraints for Cross-Border Employers
Post-employment restraints are used by employers to protect the employer’s business interests. Their aim should be to prevent former employees engaging in conduct that might harm the employer’s business interests .
Restraints can vary by the type of conduct that is restricted, their duration and their geographical scope. They will also vary in the way they are enforced in different jurisdictions. As such, organisations that operate across borders must carefully draft restraint clauses to ensure they are enforceable.
What conduct can be restricted?
Employer should think about what information an employee may become privy to that they would want to protect.
Confidentiality clauses can prevent former employees from using or disclosing information that might harm the business interests of the employer.
Non-solicitation clauses can be used to prevent former employee from enticing away people that are important to an employer. This may include customers and clients, suppliers and distribution partners, and other employees.
Non-competition clauses can be used to prevent a former employee from performing work for a competitor business.
Who can be subject to restraints?
In some jurisdictions, it may not be possible to enforce post-employment restraints against every employee. For example, in China, only senior employees can be subject to non-competition clauses. This includes senior managers, senior technical personnel, and other senior employees who owe duties of confidentiality (Article 24 of the Labor Contract Law (No. 64, 29 June 2007) (People’s Republic of China) (Labor Contract Law)).
Structuring a restraints clause
Generally, restraint clauses will include three key components, namely:
1. the conduct to be restrained;
2. the duration of the restraint; and
3. the geographical scope in which the restraint can be enforced.
Failing to include limits on the scope of the duration or geographical locations in which a restraint clause can be enforced may risk the restraint clause being unenforceable. As a general principle, restraint’s scope should only be as wide as is necessary to protect the employer’s genuine business interests.
When are restraints unenforceable?
In New South Wales, Australia, a restraint clause will be unenforceable if it offends public policy (section 4(1) of the Restraints of Trade Act 1976 (NSW)). Similarly, South Korea legislation includes that post-employment restraints will be null and void where they are contrary to good morals and other social order (Article 103 of the Civil Act (Act No. 11728, April 5, 2013) (South Korea) (Civil Act).
The Korean Supreme Court has developed a reasonableness test to determine whether a restraint clause might contravene Article 103 of the Civil Act (Supreme Court Decision 2009Da82244, delivered on March 11, 2010). This similar test is also used in Thailand, which requires a factual assessment of the relevant circumstances when considering section 14/1 of the Labour Protection Act (No.2) B.E 2551 (Thailand)).
Employers can use what is called “cascading clauses” when drafting their restraints to keep their scope broad while reducing the risk of it being unenforceable. A cascading restraint clause can specify that the restraints cover multiple jurisdictions, such as entire countries, down to smaller areas like cities or towns where the employer operates. A cascading clause can also include that the restraint operates for multiple lengths of time. The purpose of a cascading clause is to ensure there are alternative terms to govern the restraints in case a court determines that the duration is too long or the geographical scope is too wide.
Duration of restraints
A restraint clause with unlimited duration may risk being unenforceable for the reasons described above. However, each jurisdiction may differ in terms of what is considered reasonable. For example, in the Philippines, the courts have held that a two-year non-competition clause was enforceable against a former employee (Tiu v Platinum Plans Phils. Inc. (G.R No. 163512, 23 February 2007)). However, in Australia the Supreme Court of New South Wales has held that 12 months was a more reasonable duration than three-years (Dundoen Pty Limited v Richards Wills (Real Estate) Pty Limited [2020] NSWSC 15). For more information on post-employment restraints in the Australian context, click here.
Geographical Scope of restraints
When specifying which countries are covered by a restraint, international employers must be careful about which countries they choose. It may not be possible to enforce a restraint that covers the entirety of some countries. For example, China given its size and amount of regional markets (Tan Kok Yong Steve v Itochu Singapore Pte Ltd [2018] SGHC 85 at [99]-[101]).
Governing jurisdiction
An employment agreement will generally elect for one or more jurisdictions to govern the contract. However, if a breach of a restraint occurs outside the elected jurisdiction(s), it can be difficult to determine how best to enforce the restraint.
By way of example, in Naiad Dynamics US Inc v Vidakovic [2017] WASC 109, the governing jurisdiction for the relevant employment agreement was Connecticut, United States of America. The employee breached the non-competition clause in Western Australia, Australia. The employer filed for enforcement in the Supreme Court of Western Australia (SCWA). The SCWA applied the laws of Connecticut in ordering an injunction against the employer.
In California the injunction would not have been granted as non-competition restraints are unenforceable in that State. This demonstrates how complicated it can be to enforce employment restraints for cross-border employers.
Compensation for restraints
Employers may also owe former employers who are subject to restraints post-employment obligations. For example, in China employers must compensate former employees restrained by non-competition clauses (Article 23 of the Labor Contract Law). The amount of compensation is generally 30% of their average monthly salary for the previous 12 months before termination. Failure to pay compensation will make the restraint unenforceable. If the employer wishes to terminate the non-competition clause, they will be required to pay a further three-months’ compensation (Interpretations of the Supreme People’s Court on Issues Relating to Laws Applicable for Trial of Labour Dispute Cases (I) (People’s Republic of China)).
Conclusion
An employer is required to consider many factors when drafting and enforcing post-employment restraints. However, the number of considerations required to draft and enforce restraints for employees that work across multiple jurisdictions is far greater.
To find out more about employment contracts, read out article on Employment Contracts.
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